Two unrelated developments, happening as they did in the immediate aftermath of the Budget, made two telling revelations. The raid following a tip off provided by the random scrutiny of the return of one Hassan Ali Khan has revealed the proverbial tip of the iceberg roughly Rs 36,000 crore worth of transactions through Swiss bank accounts. While this is the seamier side of life, laying bare the gargantuan problem of black money in this country, the other development looked forward with the same avid interest every year is the announcement of Forbes list of billionaires.

Supreme irony

This year there are as many as 36 Indians, which is as much a matter for celebration as it is of concern. Mukesh Ambani is 14th in the pecking order and his brother Anil Ambani is 18th. The supreme irony is the country where they and other company promoters have made their fortunes lets them off the tax hook.

The hefty dividends they receive from the Indian companies are completely tax-free in lieu of dividend distribution tax paid by such companies. And the other major source of income for them long-term capital gains that they might earn from sale of shares through stock exchanges is also tax-free in lieu of an apology of tax called Securities Transactions Tax (STT). Yes, they must all be paying tax on, and filing returns for, their pocket monies salary, income from house property and interest income. But that is about all. Their major sources of income are left severely alone.

Tacit admission

In one of his numerous post-Budget interviews, the Finance Minister expressed his helplessness in not restoring the tax on long-term capital gains from the bourses in the face of the Double Taxation Avoidance Agreement (DTAA) with Mauritius. Though he did not spell out, one can easily understand what he was getting at even if restored, the tax would still be avoided, thanks to the DTAA with Mauritius.

FIIs, the movers and shakers of the market, get themselves incorporated in Mauritius, thus becoming residents of that country wherefrom the funds are poured into the Indian bourses. The DTAA with that country says capital gains earned by a resident of Mauritius is not taxable by the Indian Government but by the Mauritius Government, which curiously does not tax capital gains in the manner of dog in the manger policy.

Spurred by this intended or unintended giveaway, many of our industrialists and other rich and the famous of this country are reportedly resorting to round-tripping channelising their own investments through the FII route under the opaque Participatory Notes mechanism. By being candid, Mr Chidambaram has now let the entire country know why the DTAA with Mauritius is not being abrogated.

The Government must summon courage to do the following to put an end to the unseemly spectacle of the Forbes billionaires remaining out of the tax net:

Restore capital gains tax on profits from bourses;

Scrap the DTAA with Mauritius; and

Allow dividend as business expenditure a la interest for a company with a concomitant tax liability in the hands of the shareholders, thus knocking the bottom out of the double-taxation argument, which is at the back of the invidious present regime of sparing the shareholders completely from the tax burden in respect of dividend income.